The Fed Gets Creative in Recession-Proofing the Economy

Tuesday, April 8, 2008

With the economy fast becoming the number one issue in voters’ minds this election season and the Bear Stearns takeover sending shockwaves through Wall Street, the word recession is making its way from the business pages to everyday conversations.

Cristian Pardo, Ph.D, assistant professor of economics at Saint Joseph’s University in Philadelphia, says that while the economy may not fit into a standard definition of a recession right now, there are some indicators that would point otherwise.

"One of the main indicators is unemployment because the number of workers applying for unemployment benefits is information readily available," said Pardo. "In March, the unemployment rate climbed to 5.1 percent, which points to a recession for many economists." If this is the case, this would be the first since 2001 when technology stocks and the Internet commerce bubble burst, followed by the September 11th attacks.

The severity of the current economic downturn is difficult to gauge, and many of the corrective measures in the past don’t seem to be working, according to Pardo.

"For this possible recession, we can say the traditional monetary policy has not been effective," he said. "The Federal Reserve is being very creative and experimenting with policies they have never tried before."

The current economic crisis is affecting investment banks like Bear Stearns, which are loosely regulated entities, rather than savings banks that hold most people’s money.

"When Bear Stearns failed, the Fed decided to extend its discount window to most investment banks. That’s something that hasn’t been done since the 1930s," said Pardo. "But investment banks borrow money from very wealthy people, so many are asking ‘why is the Fed bailing out these investors?’"

Pardo said over the next few weeks, as investment banks release their quarterly profits, we’ll be able tell what shape investment banks are in now.

Although this recession started with a real estate crisis, it has moved to other areas. Pardo said if the housing market recovers, there will still be much work to be done.

"Fewer people are talking about the housing market right now," said Pardo. "If the housing market is leveling off, the crisis has already spread to other areas of the economy, like the financial market and unemployment."

For many Americans, keeping their jobs will be a priority, even if it means making sacrifices.

"If you don’t lose your job, wages will likely fall for many as the bargaining power of workers tend to fall in recessions. People will be willing to work for less to keep their jobs," Pardo said. "A lot of workers may find themselves without health insurance because many companies will not be able to fund it anymore, at least temporarily."

Pardo can be reached for comment at 610-660-1526, cpardo@sju.edu or by calling the Office of University Communications at 610-660-1222.